Spanish, Italian bond yields fall

European Central Bank head Jean-Claude Trichet reduced bond purchases to €14.3 billion from €22 billion after its buying provided much-needed relief to Italian and Spanish yields. As borrowing costs for Italy and Spain soared to unsustainable highs earlier this month, the ECB reactivated its controversial bond-buying programme. This has been successful so far, as Italian and Spanish bonds have fallen back to around 5% from above 6% previously and before ECB intervention.

Unfortunately this is not the case throughout the Eurozone, as yesterday saw Cyprus bond prices sore to 7% on €23.1 million worth of ten-year bonds, compared to 6.25% at a similar auction in June. Officials in Cyprus reacted by declaring it would consider additional austerity measures with a two-point increase in sales tax, a 3% contribution from civil servants’ salaries and additional tax for high earners.

Continuing on the European theme and fresh concerns for Greece after ratings agency Moody’s said demands for collateral from some of the states providing rescue funds could put its bailout at risk. Greece agreed last week to provide AAA-rated Finland with cash collateral for its loans to Athens, in a bilateral agreement that sparked requests for similar treatment from Austria, the Netherlands and Slovakia. Moody’s became the first rating agency to warn that the row over collateral could scupper payouts to Greece, saying a proliferation of such deals would be credit-negative for a nation it currently rates at "Ca", just one notch above default.

Meanwhile the price of gold continues to rise and hit the $1,900 an ounce mark for the first time.

The main driver behind this is growing concern about the global economic recovery and the expectation of further increase of the supply of dollars by the US Federal Reserve.The commodity rose nearly 1% to $1,913.50 an ounce over night but then gave back these gains, as confidence returned and stock markets rallied after the open of trading in Europe. Concerns of a slowdown in the US and the debt crisis in Europe have spurred demand for gold, which is seen as a safe-haven during difficult times. A further driver for this move is rumours that the US Fed may announce a further round of QE in an attempt to boost the slowing economy at the Jackson Hole summit later this week.

We are due several pieces of economic information from the Eurozone this morning with PMI data and the ZEW survey scheduled for release. It is hard however to be very upbeat over these given the recent surveys and the resultant reaction in equity markets and while the dollar has not been performing too well during the summer, it looks likely to benefit today, along with Sterling, at the euro's expense. Any gains for the pound might prove short-lived however, with the CBI industrial orders release later this morning expected to show a further decline in activity. Ahead of the UK GDP update later in the week, this might be enough to push the currency back down again.